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AD industry must act now to secure positive UK subsidy rates

Date: 2 June 2016

With the UK government set to introduce lower Feed-In Tariffs (FITs) for renewable energy generation from the end of March 2016, Johan Ostlund, director at CooperÖstlund, discusses the implications for the anaerobic digestion (AD) industry and warns that companies must act now to secure beneficial subsidy payments.

Feed-in Tariffs (FITs) were introduced by the UK government in 2010 to help increase the level of renewable energy produced by the country as it works towards the legally binding EU target of 15% of total energy from renewables by 2020. The subsidy outlined that renewable generation systems, up to a capacity of five megawatts, were eligible for financial support for producing green energy, helping to drive long-term investment in the sector.

Since then, the FITs scheme has been hugely successful – catalysing significant investment in AD technology. In 2014 alone, the AD industry installed 89 new plants in the UK, with the entire industry now exceeding 500MW of total capacity across 411 plants around the country – a significant contribution towards our renewable energy targets.

FITs have transformed the way the UK generates its power over the past three years, with over 22% of all energy coming from renewables in the early part of 2015. However, this has come at a price and the government admits that spending on clean energy support can’t continue forever.

In a bid to keep the budget under control, the government introduced a FITs degression mechanism, which automatically reduces the level of subsidy available to new projects once a certain level of deployment is reached. Now, as part of the latest review, it wants to cut expenditure on the FITs scheme to between £75 million and £100 million from January 2016 to 2018/19.

Unfortunately, as part of these latest degressions, financial support for AD sites in the UK will resultantly decrease. In fact, from March 2016, the tariff for facilities under 500KW will reduce from 10.54 to 9.36p/Kwh, while facilities greater than 500KW will drop from 9.16 to 8.68p/Kwh.

In another, perhaps more immediate blow to the industry, the government has also removed the opportunity to preliminary accredit renewable energy sites. Introduced as a tactic to freeze FIT rates, preliminary accreditation previously allowed a registered AD facility to secure positive rates and avoid degressions for up to a year – allowing owners to complete project build without rushing to safeguard subsidy rates. The changes mean that facilities will now only qualify for FIT rates offered on the date of commissioning – making it harder to propose investment return figures and making project delays very costly.

If, following these changes, the government is still unable to curb spending on renewable subsidies and decides the FITs scheme is unaffordable, then they could end it to new applicants. Even if the scheme does stay in place, then the FITs subsidy rates will continue to fall further in future years. It is therefore very clear that any business looking to develop AD sites in the UK faces a race against time in order to make the most of government support while it lasts.

In the short term, the removal of the preliminary accreditation has taken away the financial safety net for AD installations. With just six months to go until the government implements the new FITs degressions in the UK, if AD site development and commissioning is left too late, then companies could be left with significant financial losses as a result. They must act now to make sure they can finalise and commission sites before 31 March 2016. But such projects are rarely off-the-shelf solutions. For instance, there is a 14 week lead time for Combined Heat and Power (CHP) engines, so to achieve a March commissioning there are only a few weeks to finalise orders.

But, while acting quickly to secure beneficial FITs rates is key, it is also important to make informed choices when it comes to specifying AD technology, in particular when choosing the correct CHP engine. As a leading gas engine specification and maintenance expert, we have installed AD technology at many sites across the UK and, unlike other suppliers to the green energy gas sector, are not tied to a single engine manufacturer. This means that we can help businesses to choose the right CHP engine for their needs.

From our experience, protecting against downtime should be a key priority. However, being at the end of the process, engine choice is often made quickly with limited thought to the best long-term solution. For instance, in many cases two engines are better than one – giving the financial protection that if one engine breaks down, you will still generate energy and continue to make money. In other situations one engine, coupled with a robust maintenance package, keeps costs to a minimum but ensures support is only a phone call away – again protecting against loss.

The need to deal with the escalating waste challenge, combined with the requirement to produce a much greater percentage of renewable energy, means there is great opportunity for the AD industry in the UK. However, there is uncertainty about the future of government subsidies and the FITs scheme, so it is critical that any organisation planning a new AD site acts quickly to commission and complete developments in order to get the higher subsidy rates that are currently available.

By looking towards experienced AD service providers, such as CooperÖstlund, finalising projects in tight timescales and securing beneficial FITs payments is a much easier process. What’s more, by doing so, operators can be safe in the knowledge that they’ve specified the correct CHP engine for their project and they can rely on a nationally-acclaimed service provider for the lifetime of the site – minimising any down time in the future and maximising return on investment.